The Chinese government appears to be refocusing on economic management after months of political tension and there is speculation Beijing may initiate a fresh round of stimulus spending after implementing financial market reforms yesterday.

The new stimulus spending could be as high as 2 trillion yuan ($320 billion), said local reports, although it might not be in a single package.

The moves follow a State Council meeting last week in which Premier
Wen Jiabao
stated “the need for a greater emphasis on growth" indicating the government would act to prevent a sharp slowdown in the world’s second-largest economy.

Any stimulus is likely to focus on infrastructure, public housing and subsidies for consumer goods, including new cars.

But efforts to revive growth may be accompanied by a renewed push for reform of China’s state-run economy.

Beijing announced yesterday it would begin direct currency trading with Japan this week, which is likely to bolster claims it is committed to the yuan’s “internationalisation".

This is the first time Beijing has allowed a currency other than the US dollar to be swapped with the yuan.

“The government’s eye is back on the economy after six months of elite politicking," said Westpac international economist Huw McKay.

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“Right now it’s simply about putting a buffer in the way of another slowdown, but they are also looking very carefully at the reform catalogue for a new leadership."

The new stimulus spending could be about half the size of the package provided in 2009, which would be about 4 per cent of gross domestic product.

During the global financial crisis, China injected 4 trillion yuan into its economy. This led to about 14 trillion yuan in spending by local governments, which borrowed heavily from state-owned banks to finance pet projects.

New spending would be good news for Australian miners as it should increase demand for coal, iron ore and other base metals.

The speculation has buoyed Chinese investors. Shares in the Shanghai Composite Index rose to their highest level in two weeks yesterday.

But the World Bank has warned that any new stimulus could create further imbalances in the Chinese economy. Many economist are worried that the 2008-09 stimulus package created a bubble in the property market, which has since popped, and put pressure on the loan books of state-owned banks.

But it appears China is again prepared to risk further overcapacity and imbalances in its economy to preserve economic growth.

The National Development Reform Commission, the country’s top planning agency, approved 100 projects on May 21, said its website, the same number it approved in the first 20 days of the month.

Among the projects were three big steel projects, including Baosteel’s 70 billion yuan steel mill in southern China, which has been waiting eight years for approval.

The NDRC approved more than 30 wind power projects and more than a dozen hydroelectric projects in May, mostly in the western and central regions. It also gave the go-ahead to the construction or expansion of four airports and local governments are being urged to bring forward spending on rail systems and intercity highways.

Local media quoted an NDRC official yesterday as saying the government had not only increased the number of approvals but had made funding available earlier.

Spending on rail may also be boosted by the government’s decision this week to expel a former corrupt railway minister, Liu Zhijun, from the Communist Party.

The Chinese government moves to boost growth are after a string of reports in April raised concerns the economy was faltering. In addition to the new infrastructure funding, the government is planning to reintroduce subsidies encouraging people to trade in their cars for newer models.

Credit Suisse economist Dong Tao said in a report the central government “is likely to play a bigger role in funding, in contrast to 2009 where the local governments relied on bank lending for funding almost entirely" .

The government has also moved in recent weeks to boost private investment in infrastructure projects by issuing new guidelines.

UBS economist Wang Tao said in a note that while the approved projects could help push up investment this year, they would be “insufficient to support growth in the longer term if non-government investment continues to be depressed by weak exports and property activity".

Australian Trade Minister
Craig Emerson
, who is visiting Beijing, also hinted he expected more stimulus measures by the Chinese government.

“The Chinese authorities will ensure there is a healthy rate of economic growth in this country," he said.

“As occurred during the depths of the global financial crisis . . . Chinese authorities lifted their domestic stimulus to counteract the shock waves that were coming from the rest of the world. That has been the practice and I think it will be the sort of approach that will be adopted again."

Mr McKay said the currency trading announcement with Japan underlined the increasing links been the two economic giants of north Asia.

Equally he said it reflected growing regionalism and would help China’s case for the yuan to become part of the International Monetary Fund’s artificial currency known as special drawing rights (SDRs).

He said it would also give China some insulation from the problems facing the US dollar and the euro and allow it to make better use of the Japanese government bond market for investing its foreign reserves.